Editorial

Fixing Capitalism

by Fred E. Foldvary, Senior Editor

Jean-Yves Calvez, a French theologian and author of books on social issues,
has written a book, Changer le capitalisme, on what's wrong with
capitalism and how to fix it. He focuses on the problem of economic
inequality, and says that social justice requires a more equitable
distribution of income. He also says that we need some balance between
individualism and social solidarity or collective spirit. There is a
tradition in the Catholic Church, including the Jesuits in the Church, of
examining economic systems and proposing more just reforms.

Most proposed remedies for economic inequality consist of government
restrictions on enterprise, such as dictating the hours and conditions of
labor and setting legal minimum wages. The usual remedies proposed by
social reformers include redistribution of income from the rich to the
poor, and providing economic services such as medicine, housing
assistance, and welfare aid for those with children. Education is already
widely funded and provided by government.

Probably the greatest obstacle to economic reform is the use of the term
"capitalism." The American social philosopher and economist Henry George
wrote that action follows thought. When we criticize "capitalism," we need
clarity as exactly what that is. Every economy uses financial capital and
capital goods, so as an "ism" the word itself carries no meaning.

When one speaks of the problems of capitalism or changing and fixing
capitalism, the term refers to today's economic system. What is that
system? Now that there are only one or two command economies left in
this world, the countries of today's world have mixed economies, a
mixture of markets and government.

What is a "market"? A pure market consists only of activity that is
voluntary for the whole society. Government then can play two different
roles. It can be market-helping when it helps society be voluntary,
such as by prohibiting and penalizing theft. Or, government can be market-hurting, as when government interventions restrict voluntary action or make
it more costly.

When we propose remedies for social problems, there are two types of reforms
we can have. One is to only treat the effects, the symptoms. The other
approach is to determine the basic cause of the problem, and eliminate it,
curing the problem so further treatment is not needed.

Remedies for inequality such as minimum wages, welfare aid, and income
redistribution, only treat the effects. Since they do not confront the
causes, the problems persist, and are made even worse by the interventions.
We have massive intervention in almost all countries today, and poverty,
gross inequality, unemployment, and pollution are still with us.

Redistribution penalizes production, consumption, labor, and investment,
leaving workers and the poor worse off, requiring more redistribution in a
vicious circle of welfare statism. How could we cure these problems? The
effective remedy was discovered over 200 years ago by the French economists
who called their discoveries "physiocracy," meaning the rule of natural law.
They showed that government interventions such as the taxation of trade hurt
the market and thereby hurt workers and increase poverty. The natural
economic law they discovered, and termed laissez faire, was that we
get the greatest prosperity when we let the natural economy work freely, with
no restrictions or imposed costs on peaceful and honest trade.

Another natural law they discovered was that the natural economy provides
society with a "net product," which economists now call a "social surplus."
This benefit from natural resources is reflected in the market rent of land.
Use this rent for government revenue, said the physiocrats.

The founder of classical economics, Adam Smith, visited France and met the
physiocrats and he too wrote that free trade provides for the maximum
Wealth of Nations. Smith too said that land rent provides the best
source of government revenue, as landlords reap where they don't sow.
The classical economist David Ricardo came up with a more precise theory of
the "law of rent," explaining how rent comes from the differences among the
qualities in plots of land.

Karl Marx and his followers then came along and mucked up the language and
thinking. Marx wanted to distinguish the workers from all those who owned
assets, and so he lumped land into capital. From then on, most economists
followed Marx in focusing only on labor and capital, and the physiocratic
and classical emphasis on land was set aside. The neoclassical economic
thought that followed the classical was encouraged to forget land, since
this benefited the landed interests who financed them, and it also made
the mathematical models easier if there are two rather than three factors.
From now on, the system would be called "capitalism."

But is capital a problem? Capital provides investment, and investment and
better technology is what has raised living standards world-wide.
"Capitalism" makes entrepreneurs and owners of capital the villains,
whereas Ricardo's law of rent shows that much of the gain from trade and
technology go to the owners of land as rent, since wages equalize at the
least productive margin.

Henry George sought to bring back the land factor. He recognized that the
gross inequalities of wealth and income have always come from the unequal
ownership of land. This was not a new discovery, but long recognized
everywhere. In Progress and Poverty (1879) George cites the
ancient Indian Brahmins: "To whomsoever the soil at any time belongs, to
him belong the fruits of it. White parasols and elephants mad with pride
are the flowers of a grant of land."

George went beyond the classicals and physiocrats, adding a moral dimension
to economics: that workers have a natural right to their own labor and wages,
whereas since no human being created land, equality requires an equal sharing
of its benefits, as manifested by the rent. Moreover, as land value is
enhanced by government public works, it is just for that added rent to
be paid back to finance the services.

The remedy for poverty and inequality is therefore clear. The inequality and
depression of wages can be cured by equalizing the rent: either use it for
public and government revenue, or else distribute it equally to the people.
The remaining inequality from unequal wages will then be much less severe
and is justified as a reward for human exertion, talent, and skills.

George's policy is now being called "geoism," geo meaning land. Geoism fixes
"capitalism" by curing the cause of poverty and inequality, eliminating any
need for government redistribution, welfare states, minimum wages. Geoism
equalizes while also improving economic efficiency, eliminating the
market-hurting taxes on wages, profits, goods, and investment. Geoism also
harmonizes the individual with society, letting individuals keep their wages
while providing the social solidarity of sharing in the natural benefits
provided by nature and God.

Social reformers like Calvez, from all religions, have sought an economic
system that is just as well as productive. If you believe that God has
created the world and its human presence, then could it be that a just
God would put human beings on earth without any means for an abundant
economic life for all? That is unthinkable, and therefore there must be
natural economic laws that provide for universal prosperity. Moreover,
these natural laws cannot be so obscure that they cannot be discovered
and easily understood by humanity. The law of prosperity has been in
the Bible for over 2000 years: "The profit of the earth is for all"
(Ecclesiastes 5:9).

The natural-law philosopher John Locke recognized back in 1690 that God had
given the earth to humanity in common, and also that each human being, if
he is not to be a slave to others, has a moral right to his own person and
labor. The moral law that provides justice is thus in harmony with the
economic laws that provide for prosperity: share earth and keep earnings.
There is no need to equalize the ownership of produced goods if we equalize
the ownership of the earth.

Capitalism today has market-hurting interventions that take away the
earnings of labor to finance public works that redistribute the wealth
to landowners as higher rent and land value. Social justice requires
fixing and eliminating the interventions rather than hampering voluntary
action. Once this great truth becomes recognized, then surely right
action will follow righteous thought.

Copyright 2002 by Fred E. Foldvary. All rights reserved. No part of this
material may be reproduced or transmitted in any form or by any means,
electronic or mechanical, which includes but is not limited to facsimile
transmission, photocopying, recording, rekeying, or using any information
storage or retrieval system, without giving full credit to Fred Foldvary
and The Progress Report.

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